The classical economic theory can be described as a self-regulating market in which the economy is always able to achieve the natural level of GDP, when it’s free of intervention. The idea of the classical economic theory began to dominate the market in the 18 and early 19 century, during this time it was seen as the foundation for classical economics. It made the process of buying and selling an organized system instead of a chaotic scene, thus also increasing the national wealth.The classical approach also diminishes the role of the government; it gives power to consumers and businesses stating that the problem will correct itself over time, focusing on long-term goals.
In the case of Adam Smith, he argues minimizing government intervention and taxation the free market will adjust the supply and demand curves to an optimal point where the market benefits. Smith coins this as the “invisible hand” idea, in which looking out for our own interest in the market benefits, and it’s the invisible hand that adjusts the curves to an optimal point where it’s the most beneficial for the market.David Ricardo, another classical economist also viewed the whole market as one, but with a bit of a different perspective with the ideas of labor, rent, interest and comparative advantage. Ricardo emphasizes international trade and the theory of value of the labor market to strengthen the market. The way in which these two theorist look at the market is very broad because they are accounting for various factors as well as the economic landscape of the market, the fundamental idea behind classical economics.Adam Smith is said to be one of the main founders of the classical economic idea he analyzed the complex patterns and ways in which the free market and individuals act according to their own self-interest.
“The Wealth of Nations” clearly examines the way in which Adam Smith analyses these concepts. He argued that the wealth of a nation was based on part of the producers, consumers interacting without any government regulation, he insisted on this point because he believed that everyone would be willing to do what is best for them.If one was to produce a certain good, an then sell that good to another individual that needed it would be in our very on self interest to produce a product with high quality to satisfy the demand of the customer. Its this precise human nature which Smith assumes that the economy of a market will fix it self, reach the equilibrium where one wants to do the best to receive a high profit for the product, all of this can be done without any government intervention or taxation.Individuals within the market will continue to make transactions and the overall result would be a balanced economy where supply and demand in a market are at equilibrium. David Ricardo also played a big role in the ideas of a classical economy.
After reading “Wealth of Nations” by Adam smith he became inspired and analyzed the economy in a different perspective. As a classical economist he was very open to the idea of free trade and free competition without any government intervention. Trading among countries was great because there was a mutual benefit from trade; it made both countries better off.In order for this to happen Ricardo came up with the idea of comparative advantage, which he analyzed as the ability of a country to produce a good at a lower marginal cost than the other country.
The concept was accepted and put into action because the results made each country more prosperous. Ricardo also thought of other concepts such as the rate in which rent is charged, he believed that fertile soil that produced more product would be rented at a higher rate because its worth it and you will get more product in return.While a unfertile land would be rented at a very cheap rate or none at all as Ricardo would say because the return of the land is not worth it the renter would not obtain much gains. On the concept of land Ricardo also had other ideas such as the idea of diminishing returns, when more units of production are factored in to the production phase and the rest of the system remains the same without any changes the overall input falls. The output falls because the attention that is put into every product produced is less and less and after a point this can’t keep up with the rate of production that results in bad quality returns.
With the production of products the factor of wage comes into effect, Ricardo also had great influence in the principle of minimum wage, which he helped establish. Minimum wage was put into effect because of the concern Ricardo had of a growing population that would be seeking jobs, which would increase the demand for jobs and would work for also nothing. The effect that the minimum wage has is to set a minimum price in which people will be willing to work, anything lower than the minimum wage would not be accepted because they know they can work elsewhere and obtain the minimum wage.Minimum wage also makes sure that those working can have some a decent living and enables them to survive.
David Ricardo’s theories are open an don’t require the intervention of government making him a classical economist. The economic landscape of the future has been thought of by these two classical economist, Adam Smith and David Ricardo created the basics of the economy and now we are currently use all these concepts in order to run the market of today.Smith’s idea of absolute advantage was important but it did not account for the economic landscape it was only one thing, not a combination of items. While absolute advantage is important it has its flaws, since a country cannot have absolute advantage in anything thus trade would not happen.
It only infers to those countries that are well off in one are or another, but not all countries are thus it brings problems with trade among countries. Ricardo was more thoughtful and in many ways developed more concepts, which we currently use today.Comparative advantage is a huge idea that is currently used today to create the economy, countries that have an advantage in producing the product at a lower marginal cost go ahead and produce the product and then just trade with another country to exchange the goods. In our current economy China’s comparative advantage is labor intensive while in the United States is more of human labor intensive because of the highly educated force, China trades products while the United States trades services with China.This enables both China and the United States to be better off because each country produces the product at a lower marginal cost.
Another concept that is also widely use in all of America is minimum wage this has set the price in which any individual would work, any price below is too little and people will not work. Minimum wage has set a floor in the economy, it makes sure that low skilled workers have a way of survival and at the same time it ensures that no one works for less than that state by the minimum wage laws.Rent is another concept that is widely used in todays market because retail space that is said to be “fertile” is that were foot traffic is heavy and gives the owners a lot of customers, which in return makes a higher return of revenue. The opposite is true as well; a retail space that is unfertile is one that is hidden away and not many people visit.
The same concept that Ricardo applied to agricultural land can be applied to our current retail land and we see that the same is true, a retail space in a heavy traffic area has a higher rent than one that does not, since one will produce more revenue than the other.David Ricardo had thought more about the future and his concepts can be currently applied dot what we have today. Ricardo did try to develop a comprehensive economic landscape of the future because many of his theories were well thought, and they are concepts that were applied to his time and continue to be applied because they are efficient and make the market. The ideas were revolutionary in the time they were created but also in our time meaning that many aspects were taken into consideration, even the social aspect of the market by including the changing labor force and the way we see fertile and unfertile land.
